business news in context, analysis with attitude

On the subject of the FTC’s objections to Whole Foods’ acquisition of Wild Oats, MNB user Phil Censky wrote:

I’m currently living in a market with both Whole Foods and Wild Oats presence (Phoenix). I would not be at all surprised if the Wild Oats near me was closed (by Whole Foods or heck, anyone else who ends up buying them). Would it lead to higher prices? I doubt it: not with Trader Joes, Sprouts, and Sunflower Markets currently open and Tesco on the way. Wild Oats was already the highest priced retailer in the area. If Whole Foods raised prices, they’d get killed by the competition.

Currently, I can probably travel 15 minutes and find over a dozen stores (traditional and specialty) that sell organic products. Any guess how many different options I have for cable or telephone service? Where are those “Consumer Interest” groups during the mega-mergers within the telecom and media industries? Certainly consolidation of media is much more dangerous than a couple “granola stores” getting hitched?

Another MNB user wrote:

Funny how the oil companies can merge and / or acquire other oil companies with no problems but other business have to jump thru hoops!

Maybe Whole Foods needs more lobbyists throwing money around Washington DC to get the acquisition completed!

I’m not sure that the world needs more lobbyists, but I agree with your point.

I find it infinitely more distressing that the government has not raised any red flags about the impending takeover of the Wall Street Journal by Rupert Murdoch. And this is not a political issue. I also wouldn’t want the Journal taken over by NBC, CBS, Disney, the New York Times or the Washington Post. Any of these are unacceptable because it puts too much power into just a few hands.

The FTC argues that Whole Foods behaves improperly because it may demand that its suppliers not sell identical items to Wal-Mart. To which one MNB user responds:

With regard to Whole Foods blocking suppliers from selling to Wal-Mart.. I suppose Wal-Mart does no arm twisting!

If Wal-Mart didn’t invent arm-twisting of suppliers, it certainly perfected it.

That said, I’m not sure of the legalities…but since when is it improper for retailers to take product on the condition that they have exclusivity?

One MNB user, however, disagrees with some of my conclusions:

While it’s likely the WFM-WO merger will go through, your idea that Whole Foods will reduce prices is naïve, which is surprising to me.

WFM already has the biggest buying power in the natural/organic trade, and are consistently increasing margins and prices in many categories. Why would they reduce prices after they absorb the competition? They will use high-margin private label brands to compete on price directly with Trader Joe’s in center store categories and a few high visibility items (organic milk, etc.), and will continue to get top dollar in their high end perimeter categories and national branded natural/organic packaged goods. Unlike regional grocery chains serving the broad middle demographic and competing for the same households, WFM’s stores are located precisely where pennies don’t matter to consumers. They’ll have 300 locations in a market universe of 50,000+ food stores nationally. They’ll never need to compete on price.

Fine. Let them raise prices or keep them high. My argument is that there are plenty of other options out there for consumers. And if they start losing sales to, say, Sunflower, Whole Foods will have to lower prices. Or not. But consumers have other choices, which I thought was the whole point.

MNB user Philip Herr had some thoughts on the argument we’ve all been having about the carrying restaurant-branded products in supermarkets. (I think it is a mistake because it gives visibility to competitors in the battle for share of stomach; virtually the whole world disagrees with me.)

I know you have been consistent in your opposition to supermarkets carrying branded products from "competitive" chains that vie for the same share of stomach. I can't agree with you. Firstly you are assuming that all shopping trips are equal in the needs that they serve. Not true, a trip to the supermarket to stock up, fulfills a different role from stopping by the coffee shop to buy coffee and a donut. So by purchasing packaged coffee at Costco or Kroger, the shopper is satisfying a different need, which I see as totally non-competitive.

The second objection I have to your position is that supermarkets generally all carry the same SKU's. (I'd guess that 95% of branded offerings in center store are common to every chain). So by extrapolating your argument, Kroger should stop carrying Tide because both Costco and Wal-Mart carry it also. How is Dunkin' Donuts packaged coffee different from Maxwell House or Folgers or Starbucks -- all of which are available in packages in my local Stop & Shop and just about all supermarkets?

Bottom line, as long as supermarkets continue to satisfy consumer needs in every way they can, they should carry whatever brands appeal to them.

In a broad sense, I disagree. Supermarkets ought to be carrying products – or at least putting the greatest emphasis on products – that differentiate them from the competition. You’re right – supermarkets generally carry all the same SKUs. And that’s why, in my humble opinion, they end up battling about price and driving down everybody’s margins. That’s why consumers carry a dozen ‘loyalty cards” and use them only to get lower prices. That’s why the real growth is coming from the differentiated chains such as Trader Joe’s and Whole Foods. And that’s why almost 50 percent of the nation’s food dollars are being spent on food eaten outside the home – because supermarkets think they aren’t competing with fast food chains, and because so many of them haven’t given consumers compelling and differentiated reasons to shop their stores.

I argued at one point that rather than carrying Dunkin’ Donuts products and giving that chain increased visibility – especially in places where it does not yet have stores but plans on building them – supermarkets ought to have a better coffee and doughnut program. But MNB user Dale Tillotson disagreed:

Supermarket donuts have become the lowest standing member of the donut totem pole, proven by the fact many retailers now invite donut shops into their business.

This does two things.

1- It saves retailers valuable labor dollars that they have been using to produce an inferior donut in the first place.

2- It starts to get customers back into their stores to pick up those somewhat decent donuts by made by somewhat decent donut makers.

Ah, there’s the key – “saves retailers valuable labor dollars.”

So it really isn’t about not being able to make a better doughnut. It’s about the fact that it takes a real investment to do it right, and retailers would rather save the money than get competitive.

For just a moment, forget about my literal argument that brand such as Taco Bell, White Castle, California Pizza Kitchen and the like ought not be sold and billboarded in supermarkets.

I’m talking about share of stomach. I’m saying that while there are different need states and different shopping occasions for consumers, supermarkets in general – which have a declining share of stomach – cannot afford to be bolstering the competition for short term profits.

Once again, permit an aging former altar boy to quote Scripture:

What does it profit a man if he gains the whole world but suffers the loss of is own soul?

By going for the short tem dollar and not competing for share of stomach at every turn, the supermarket industry risks the loss of its soul. And in the end, it’ll lose the world, not gain it.

As the famous Jimmy Malone once said (in words that were given to him by David Mamet):

Here endeth the lesson.

(Go ahead, take your best shot. I’m sort of enjoying being the vocal minority of one on this issue…)
KC's View: